Archives For December 2009

Here are three newly-published books that would make great gifts:

Common Sense On Mutual Funds
Common Sense on Mutual Funds – Fully Updated 10th Anniversary Edition
by John Bogle

I have been (slowly) reviewing this book chapter-by-chapter because it’s almost like a textbook for common sense investing. John Bogle is a great guy and is definitely on the side of the investor. This book—despite its size—is easy-to-read and interesting. It would be great for both a young person with limited understanding of personal finance and an older person who needs a kick in the pants to get started.

Bogleheads' Guide to Retirement Planning
The Bogleheads’ Guide to Retirement Planning

This book is a follow-up to The Bogleheads’ Guide to Investing. For those of you not familiar with the Bogleheads, they are a group of John Bogle “disciples.” They have their own forum ( where they share ideas as well as offer advice and help to all who ask for it. I’m a member of the group but haven’t been active due to time restraints. I’m going to try to spend more time over there this next year.

What’s different about this book is that it is a group effort with each chapter written by a different author. What’s also kind of cool is all royalties from this book are donated The National Constitution Center. This book would be great for anyone with retirement in their future as well as those who are already retired.

The Little Book of Safe Money
The Little of Book of Safe Money
by Jason Zweig

This is the latest book in the ever-expanding “Little Books, Big Profits” series from Wiley. The cool thing about this book is that it’s small and can be read in one sitting. It’s also written by Jason Zweig, who seems to be everywhere these days. I’ll be talking more about this book in the near future.

There you have it. My short list of great books for giving away this season.

NOTE: All links are affiliate links

I don’t know about you, but I find this surprising…

This year 43% of consumers said they intend to cut back their holiday spending, compared to 55% last year. But the 43% figure is still much higher than in the previous eight years of 2000 to 2007, a period when the percentage intending to spend less never exceeded 35% and dipped as low as 21% (in 2002).*

Only 43% of people surveyed are cutting back on their holiday spending this year. Is this a sign that things are improving or are people just not facing reality?

What about you? Are you cutting back this year, spending more, or keeping it about the same as last year. We are trying to cut back this year. Part of the reason being that we spent a lot of cash earlier this year on some major expenses. We were fortunate to have the cash available for those expenses but they ate up our nice cushion. So, we are being a lot more careful with our spending this year.

*Spending Survey conducted by the Consumer Federation of America (CFA) and the Credit Union National Association (CUNA).

This is a chapter-by-chapter review of John Bogle’s Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition*. As the series progresses, I’ll create an index of each chapter.

Chapter 2 – On the Nature of Returns

Chapter 2—if you can’t already tell from the title—looks at where market returns come from. We’ll start with stock market returns.

On page 51 of the book, Bogle lists three variables that determine long-term (a decade or so) stock market returns:

1. The dividend yield at the time of initial investment.

2. The subsequent rate of growth in earnings.

3. The change in the price-earnings ratio during the perioid of investment.

This makes a lot of sense when you think about it. The higher the initial dividend yield, usually the lower initial purchase price. The lower the initial purchase price, the greater the potential for future gains.

For example, if current dividend yields are 2%, earnings growth is expected to be 4%, and the P/E ratio is projected to go from 13 to 20 over the next ten years (4.4% per year), the expected return would be around 10.4% over the next ten years. Of course, that’s not what we’re looking at these days.

According to this week’s Barron’s, the S&P 500 has a current dividend yield of 1.98% and a P/E ratio of a whopping 86.2! Keep in mind that the P/E ratio is price divided by earnings. The earnings for the S&P 500 index have plummeted 46.10 to 12.83, while the index value has gone from 876.07 to 1105.98. That’s the reason for today’s massive market P/E. The only way for the market P/E to get back down to a more reasonable level (of say 15 to 18), two or three things have to happen:

Investment Return consisting of…

1. Earnings must increase

2. The index price level must decrease

and Speculative Return…

3. A combination of the two.

At the current level of 1105.98, earnings would have to increase to $61.44 to $73.73 in order to bring the P/E ratio back to a normal level.

Were the adjustment to come from the price level of the index, the value of the index would have to drop to between 189.45 to 227.34. Ouch!

There’s no doubt that with earnings as low as they are, that they are bound to recover somewhat. We just don’t know how much and how long it will take for them to turn around.

Anyway, back to the main point. If the dividend yield is currently 1.98%, corporate earnings are expected to grow at 6% (a number I got from the book), and the P/E ratio for the index is expected to drop to 25 (-22% per year…a guesstimate) over the next 5 years. The average rate of return for the index over the next 5 years would be -14%. Not very encouraging.

As far as bonds are concerned, the metric Bogle uses to predict future long-term (10 years) bond returns is simply the current yield at time of purchase. According to his research, the initial yield had a correlation of +.93 (+1.0 is perfect correlation) with the returns earned on bonds following the intial purchase.

Bogle goes into more detail than I can give you here. I gave you the basic points of the chapter.

Next, we’ll look at Bogle’s thoughts on asset allocation.

*Affiliate Link

My wife was in a safety meeting earlier this week and one of her co-workers mentioned a video they saw about the dangers of driving on old car tires. What’s an old car tire? According to the video, it’s any tire that is older than 6-years old. The video goes on to show how to check the date when your tires were manufactured. It’s pretty easy to figure out once you know the formula.

I took a picture of my car’s tire to use as an example:

Checking the Age of Your Car Tires

The number we want to concentrate on is 3809 at the end of that series of letters and numbers. What this number tells us that the tire was manufactured in the 38th week of 2009 (around the first week of September). Had the number been something like 389, it would have meant that the tire was manufactured in the 38th week of 1999. NOTE: the code will always be numbers…no letters.

So, if tires older than six years old are a problem, then we are looking for tires that end in 03 or older.

What’s the big deal about old tires (even if they are brand new)? Well, over time the rubber dries out and breaks down, which can lead to the tire losing its tread or just falling apart while you’re driving. Very dangerous.

Here’s the 5-day forecast for my part of the country:


It’s not a big deal unti you realize that I live 40 miles from the Gulf and we NEVER see snow in our area.

This is a chapter-by-chapter review of John Bogle’s Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition*. As the series progresses, I’ll create an index of each chapter.

Chapter 1 – On Long-Term Investing

Summary: To invest with success, you must be a long-term investor.

Bogle opens the chapter with a discussion of long-term growth rates for various asset classes (mainly stocks). Remember, that this version of the book is the old book with inserted or updated thoughts. In his discussion of long-term returns, Bogle added this, which I found interesting:

Despite the woes encountered by the stock market over the past decade, our economy continued to grow solidly, at a real (inflation-adjusted) rate of 1.7 percent, exactly half the 3.4 percent growth rate of the modern economic era. Despite the onset of recession in 2008, the gross national product (GNP) actually rose by [a] skinny 1.3 percent for the full year, although a decline (the first since 1991) of about 4 percent is projected for 2009.

But after this winder or our disciontent—from mid-2008, through the winter of 2009—we have enjoyed a spring and summer of recovery. for what it’s worth, the stock market provides far more value relative to our economy than was the case a decade ago. Then, the aggregate market value of U.S. stocks was 1.8 times the nation’s GNP, an all-time high; by mid-2009, with the value of the market at $10 trillion and hte GNP at $14 trillion, the ratio has tumbled to 0.7 times, 60 percent below the earlier peak, and roughly the same ratio as the historical average.

Not sure why he chose to use Gross National Product rather than Gross Domestic Product but I guess it doesn’t make much difference. The point to take from the quote is that the stock market isn’t as fully valued as it was ten years ago.

One thing that bugs me about chapter 1 is that Bogle relies heavily on Jeremy Siegel’s book, Stocks for the Long Run. The bulk of Siegel’s book is accurate but his data for index returns from 1802 to 1926 is unreliable because it was based on an index that was cherry-picked and consisted of very few stocks (more on this later).

Bogle then goes on to talk about the risk characteristics of both the stock and bond markets and shows how the wide swings (volatility) in market returns tend to dissapate the longer one stays in the market. Read this post to see what I mean. Bogle mentions that one way to fight the volatility of the stock market is to include bonds in your portfolio. This is pretty standard stuff.

The chapter then moves on to discuss costs. Basically, Bogle believes that when it comes to investing, you get what you don’t pay for. It’s very hard to beat the market so the only thing that keeps you performing as well as the market is costs. He breaks it down like so:

1. All investors own the entire stock market, so both active investors (as a group) and passive investors—holding all stocks at all times—must match the gross return of the stock market.

2. The manage fees and transaction costs incurred by the active investors in the aggregate are substantially higher than those incurred by passive investors.

3. Therefore, because active and passive investments together must, by definition, earn equal gross returns, passive investors must earn the higher net return.

It’s important to note that Bogle is not saying that some active managers can’t outperform the market but that on the whole, they can’t because of expenses. Interesting thought.

He closes out the chapter with a list of six simple principals for long-term success (along with my thoughts):

1. Invest you must. For most people, there’s no other way to build wealth.

2. Time is your friend. Start as EARLY as you can and put the magic of compounding to work.

3. Impulse is your enemy. Don’t allow your emotions to take control.

4. Basic arithmetic works. Watch your investment expenses and keep them under control.

5. Stick to simplicity. Keep it simple by sticking with a simple asset allocation.

6. Stay the course. Through thick and thin, stay the course. Reread the other five principals when you feel yourself wavering.

Okay, there’s your review of Chapter 1 – On Long-Term Investing. Tomorrow we’ll look at Chapter 2 – On the Nature of Returns.

*Affiliate Link

I Don’t Like Change

December 1, 2009

As has been my usual habit at the end of each month this year, I visited to look up the month-end values for the S&P indexes. Well, today I noticed that the page I usually visited looked different from the last time I visited. Then I noticed that some of the features I had grown to love were now GONE!


I used to be able to go in and pick a date and get the index’s performance up to that date for the day, month, quarter, and year. It was a nice little feature. Now it’s gone and I’m sad.

Dow Jones did something similar with their index website last year. They ruined it to the point that it isn’t even worth visiting. In fact, I don’t think I have been on their website but maybe once or twice this year.

I looked around the S&P website to see if the info I was looking for was housed elsewhere. I found a data page but they only house 6 months of rolling data. That’s pretty much useless to me. They do have a link for people register to gain more access to the site. I registered but didn’t notice any change in the available information. I did notice that they replaced the link to register with a link to become a SUBSCRIBER. In other words, “fork it over buddy.”

What I have been finding out lately is that when it comes to companies and change, the change usually means something that was previously free now has a price tag.

I don’t like change.